Economics: I, Pencil

[shanek]

I'd like to see some of the evidence that proves this. The pattern that neoclassical economists assume is the one that I have described (and is not as well supported as you think). Bring on your evidence.

Well, how about a real-world example coupled with logic?

Remember the "Tickle Me Elmo" fiasco of several Christmases ago? When the CTW released the doll, it was set at a certain price, and people bought it at that price. It achieved a market equilibrium. But then, one of those daytime talk show people recommended the doll and then people started buying it in droves. What happened was that the demand curve shifted to the right; more people were willing to buy the doll at a certain price than would before. So it started flying off the shelves, and the CTW had no choice but to step up production and raise the price, just as economic theory predicts.

Now, relating this to your point: "individuals must act as atomized utility maximizers. They must not be subject to any outside influences (culture, societal norms, traditions, etc)." This is clearly not necessary for the above example to fit the economic predictions. In fact the culture (in the form of a daytime talk show) contributed to the increase in demand. They most certainly were acting on outside influences.

What you're describing is a revision made to neoclassical econ by March and Simon. People do not engage in endless searches for the best possible price (option, whatever). They search until they find an acceptable price. This is called 'satisficing'. However, neoclassical models still use perfect rationality as an assumption.

Not really...no moreso than just saying that each individual makes his own call as to what price is acceptable. And it makes no sense to always search for the best possible price. If it takes you all day, and you only save about 50¢, then it just isn't worth the effort.

No, they don't - at least not in the models.

Well, they do in the real world. As a small businessman I can tell you that. We do it all the time.

Read Oliver Williamson's The Economic Institution's of Capitalism. Williamson is an 'insitutional' economist who has brought this issue into the debate.

Institutional Economics was made to be at odds with the Chicago school and, as such, doesn't hold much credibility in my book. Their idea is that transaction costs act as a sort of friction, slowing the flow of goods and services as they move through the economy. The problem with this idea is, most transaction costs are necessary. You just can't to business without them, and so any business's pricing scheme is going to have to take them into account. The unnecessary ones are invariably due to government regulations.

OK, maybe I sould have been more clear here. People do not search for the best possible option (I should have said this instead of price). People 'satisfice'. However, this has implications for the models that assume that people look for the best deal that they can get (whether it be price, quality, etc). If people don't know about a better option then they cannot take advantage of it.

I'd really like to know what models you're talking about...all the ones I've ever seen deal precisely with what consumers will accept, with what they'll be satisfied with. The "best" option is a subjective thing.

Did I write that 'Shanek assumes these things'?

You said, "Libertarians subscribe to an extreme version of neoclassical economic theory..." which assumes these things, and, as I am a Libertarian, you most certainly attributed this subscription to me.

In the models, economist assume that firms are motivated to maximize their profit. Firms are sometimes out to maximize profit but this is not always the case. This should be treated as a variable and not a given.

It is, but if you're taken in by the Institutional Economists then it's easy to see how you were misled. I can tell you first-hand that the real world does not work that way.

 

[shanek]

The problems come about as a result of being exposed to volatile (and unchecked) financial flows. Countries that open up their financial markets without adequate institional support (read: goverment)

You're reading the wrong thing into it. Institutional support refers to support of their financial markets to foreign banks, most of which, as I said, are run by governments, but that's not the same thing as saying the government of those countries needs to regulate the industry.

 

[digitalmcq]

You're reading the wrong thing into it. Institutional support refers to support of their financial markets to foreign banks, most of which, as I said, are run by governments, but that's not the same thing as saying the government of those countries needs to regulate the industry.

Here's the thing. You argue that govt needs 'to keep its cotton pickin' hands' off the economy. The market, however, cannot exist without the govt. The govt, the market, and the broader society are intertwined in such a way that it is impossible to separate them.

 

[digitalmcq]

Well, how about a real-world example coupled with logic?

Remember the "Tickle Me Elmo" fiasco of several Christmases ago? When the CTW released the doll, it was set at a certain price, and people bought it at that price. It achieved a market equilibrium. But then, one of those daytime talk show people recommended the doll and then people started buying it in droves. What happened was that the demand curve shifted to the right; more people were willing to buy the doll at a certain price than would before. So it started flying off the shelves, and the CTW had no choice but to step up production and raise the price, just as economic theory predicts.

Now, relating this to your point: "individuals must act as atomized utility maximizers. They must not be subject to any outside influences (culture, societal norms, traditions, etc)." This is clearly not necessary for the above example to fit the economic predictions. In fact the culture (in the form of a daytime talk show) contributed to the increase in demand. They most certainly were acting on outside influences.


DMcQ: This illustrates my point. Outside factors do impact economic action. The neoclassical economists ignore this in their models. As to tickle me elmo, yes, the concepts of supply and demand were working overtime here. However, there are times when market forces break down.


Not really...no moreso than just saying that each individual makes his own call as to what price is acceptable. And it makes no sense to always search for the best possible price. If it takes you all day, and you only save about 50¢, then it just isn't worth the effort.

DMcQ: I agree completely. However, neo econs assume that people have access to perfect information. Econometric models make this assumption.

Well, they do in the real world. As a small businessman I can tell you that. We do it all the time.



Institutional Economics was made to be at odds with the Chicago school and, as such, doesn't hold much credibility in my book. Their idea is that transaction costs act as a sort of friction, slowing the flow of goods and services as they move through the economy. The problem with this idea is, most transaction costs are necessary. You just can't to business without them, and so any business's pricing scheme is going to have to take them into account. The unnecessary ones are invariably due to government regulations.

DMcQ: Most scientific theories arise out of a recognition that current paradigms are flawed. Neoclassical econ arose in opposition to historical economics. Unfortunately, historical economics has been marginalized ever since. That has been a serious loss for the discipline.


I'd really like to know what models you're talking about...all the ones I've ever seen deal precisely with what consumers will accept, with what they'll be satisfied with. The "best" option is a subjective thing.




You said, "Libertarians subscribe to an extreme version of neoclassical economic theory..." which assumes these things, and, as I am a Libertarian, you most certainly attributed this subscription to me.



It is, but if you're taken in by the Institutional Economists then it's easy to see how you were misled. I can tell you first-hand that the real world does not work that way.

DMcQ: They accept perfect rationality, etc. They question the assumptions that people do not act opportunistically and that there are no transaction costs. I haven't been taken in by them - they're models are very flawed. Not useless (and neither are the neo econs) they just can't explain everything.

 

[shanek]

Here's the thing. You argue that govt needs 'to keep its cotton pickin' hands' off the economy. The market, however, cannot exist without the govt. The govt, the market, and the broader society are intertwined in such a way that it is impossible to separate them.

Balderdash. The government is there to protect our rights; nothing more. It needs no more role in the free market or any other aspect of our lives than that.

 

[shanek]

DMcQ: This illustrates my point. Outside factors do impact economic action. The neoclassical economists ignore this in their models. As to tickle me elmo, yes, the concepts of supply and demand were working overtime here. However, there are times when market forces break down.

Well, since I never said they did, and any models that do this (I'm unaware of any) are obviously flawed, then they're irrelevant to this thread. So instead of asking you to present these "models" I'll just ask you to provide a real-world example, backed up with reasoning, as I did, of market forces breaking down.

DMcQ: Most scientific theories arise out of a recognition that current paradigms are flawed.

Yes, but unfortunately economics is more political than science. People in power are always looking for "theories" that tell them what they want to hear. That was basically what the Keynesians were all about. Now that they're pretty much discredited, they're looking for something else that gives them some justification in intruding into a free market.

 

[The Central Scrutinizer]

It needs no more role in the free market or any other aspect of our lives than that.

And yet you wanted them to intervene in the affairs of the CPD, a private company.

Hypocrite.

 

[CFLarsen]

And yet you wanted them to intervene in the affairs of the CPD, a private company.

Hypocrite.

That had nothing to do with shanek's ideas of economics. That was all about how Libertarians could be more powerful, politically.

It's all about Libertarians, and how they get their way, you see. And they are right, too, and you are just a woowoo! So there!

 

[Brian]

I won't swallow any theory whole. No more Libertarianism than Socialism. They both have their points.
That said, I don't buy butter. It's too expensive and margarine is cheaper and compareable in quality.
Shane seems to think that this follows in all aspects of economy. His detractors seem to think that if it won't work in every case, it can't work in any case.

Just my 2 cents. I'd look for a balance. Regulate only where it can be objectively determined that regulation is for the greater good. Not that it's better in all cases, or never good in any case.

Of course, greater good is subjective...

 

[Chaos]

Okay, so, how are you "defining" intervention, free, and market? Because you seem to be using a very weird definition of at least one of these terms. Unless you think murder is a free market transaction.

Shanek, you are the one who started talking about murder. I was talking about collusion, cartels and such stuff - which are free market transactions.

Oh, and by the way, murder can be a free market transaction - if the victim is the guy who was going to make a better offer than the guy who paid the hitman did . And hiring a hitman is always a free market transaction.

In a completely free market, anything is allowed. Which is why I am opposed to a completely free market.

 

[Earthborn]

Well, Shanek, I liked the pencil story. Thanks for posting it!

I wonder about a few things though. The pencil tells that no one in the world really knows how to make pencils. There are in fact thousands of individuals each contributing only a tiny amount of know how. If many individuals can contribute tiny amounts of know how resulting in incredibly complex processes know one really understands but that function anyway, why should we assume that those individuals can't make government regulations work?

Another thing I don't understand: the Soviet Union managed to make fine pencils, and many of the countries named in the article didn't have markets that were as free as Free Markets as we understand them today. The article is a great story about how incredibly interconnected and interdependent the world is, and to which great achievements humankind is capable when people are working together. But I don't see how 'freedom' fits in all of this. Plenty of unfree countries manage to do similar things.

 

[shanek]

I won't swallow any theory whole. No more Libertarianism than Socialism. They both have their points.
That said, I don't buy butter. It's too expensive and margarine is cheaper and compareable in quality.

And I disagree; I think butter tastes much better and is worth the extra money. Isn't it great how the free market gives you that choice? That you can make that evaluation for your own life, and there isn't one way forced on anyone?

This is why all these "problems" with the free market are ridiculous. The people who say they're problems assume that there's one right way, one best way, one most efficient way, whatever, of doing things. And that's just plain wrong. People are different. They have different tastes and needs and priorities.

Just my 2 cents. I'd look for a balance. Regulate only where it can be objectively determined that regulation is for the greater good. Not that it's better in all cases, or never good in any case.

This doesn't sound good to me. A lot of tyrants have done things for the "greater good."

 

[shanek]

Shanek, you are the one who started talking about murder. I was talking about collusion, cartels and such stuff - which are free market transactions.

Oh, and by the way, murder can be a free market transaction - if the victim is the guy who was going to make a better offer than the guy who paid the hitman did . And hiring a hitman is always a free market transaction.

In a completely free market, anything is allowed. Which is why I am opposed to a completely free market.

Murder is not a free act, so it's ridiculous to say that it's part of a free market. You're operating from a definition of "free market" that is completely at odds from what proponents of a free market actually consider it to be.

 

[CFLarsen]

Murder is not a free act

Come again? Who decides why someone kills another person? God?

 

[shanek]

I wonder about a few things though. The pencil tells that no one in the world really knows how to make pencils. There are in fact thousands of individuals each contributing only a tiny amount of know how. If many individuals can contribute tiny amounts of know how resulting in incredibly complex processes know one really understands but that function anyway, why should we assume that those individuals can't make government regulations work?

Excellent question! One reason is, because with government regulations the entire process must be codified and followed to the letter. With a pencil, suppose someone found a better way to make the brass cylinder holding on the eraser? Or a better material to make it out of? Or a better way to mix graphite, or a better material? Or a better kind of wood, or a substitute because they start cutting down too many straight cedars and they can't grow new ones fast enough? The free market has the flexibility to change; government doesn't.

Here's a real-world example, and something I didn't know until I started following RealCampaignReform.org's case against the BCRA: When you file legal briefs to Federal court, there's actually a certain kind of paper codified into law that you must use. Back when the law was written, this kind of paper was widely popular. Now, it has to be made especially for people filing court briefs by companies making it specifically for that purpose. Of course, this paper is much more expensive than regular paper which would work just as well for the purpose. So a surprising proportion of the expense of filing these briefs and other documents was just wasted money, and valuable fundraising dollars had to be spent on something that didn't really generate any extra value, but that was simply required by government regulation.

Another reason is, as the pencil points out, most of the people involved do their jobs not caring or even knowing that it's going to be used to make a pencil. That's obviously not the case with government regulation.

But the biggest reason is, the pencil making works because each person is a voluntary player in the process. This is what helps it be efficient and effective, and allows it to grow and change as needs change or as technology improves. Government is force, and force is stoic and resistant to change. So the Invisible Hand doesn't work with government.

The article is a great story about how incredibly interconnected and interdependent the world is, and to which great achievements humankind is capable when people are working together.

You miss the point—these people aren't working together in any meaningful way. They don't have to be.

But I don't see how 'freedom' fits in all of this.

Then you need to reread the last few paragraphs.

if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand--that is, in the absence of governmental or any other coercive master-minding — then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.

Once government has had a monopoly of a creative activity such, for instance, as the delivery of the mails, most individuals will believe that the mails could not be efficiently delivered by men acting freely. And here is the reason: Each one acknowledges that he himself doesn't know how to do all the things incident to mail delivery. He also recognizes that no other individual could do it. These assumptions are correct. No individual possesses enough know-how to perform a nation's mail delivery any more than any individual possesses enough know-how to make a pencil. Now, in the absence of faith in free people — in the unawareness that millions of tiny know-hows would naturally and miraculously form and cooperate to satisfy this necessity — the individual cannot help but reach the erroneous conclusion that mail can be delivered only by governmental "master-minding."

 

[Chaos]

Murder is not a free act, so it's ridiculous to say that it's part of a free market. You're operating from a definition of "free market" that is completely at odds from what proponents of a free market actually consider it to be.

Then please define "free act".

My point is, actually, that what you call "free market" actually isn´t free - it´s just "market without the rules we don´t like".

 

[shanek]

Then please define "free act".

An act where all parties are voluntary and knowing participants.

 

[CFLarsen]

An act where all parties are voluntary and knowing participants.

So, if someone sells me a car with flaws I don't know about, that is not a "free act"?

 

[shanek]

So, if someone sells me a car with flaws I don't know about, that is not a "free act"?

Correct, it is not a free act, unless the car is specifically sold "as-is."

 

[CFLarsen]

Correct, it is not a free act, unless the car is specifically sold "as-is."

Who will guarantee that it is sold "as is"? Who will enforce it?

Who will prevent the car salesman from going back and change the terms of sale?

Da gubmint?

He'll go bankrupt, because word will get out? Gee, I've seen rich people in Monaco who got rich before "word got out". They didn't care, and they are still rich. That OK with you?

What if it isn't sold "as is"? I'm f***ed, because I'm too dumb?